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Computing Inflation In Real Time
Written by Brad Zigler   
Thursday, 14 August 2008 13:04
Today, journalists and pundits waited for the monthly inflation reports to be released by the U.S. Bureau of Labor Statistics (BLS). Upon their issuance, newsrooms become frenzied as ink-stained wretches put out calls to economists and sell-side analysts for comments.

Calls went in the opposite direction, too, as pundits tried to get their names and their quotes in print (or electrons for the digital editions) for their clip files.

It's, in a way, quaint. There's the government, dropping a pearl once a month, and there's the journos who scramble after the bauble, hold it up to the light and try to divine the health of the oyster that spawned it.

The problem is that nobody really puts much stock in the inflation numbers issued by the government anymore. It doesn't much jibe with people's lived experience, judging from the stories I hear. For the most part, hedonic pricing and the carving out of food and energy prices from "core" inflation seem to be weasling techniques meant to downplay the virulence with which prices are rising.

This morning, the BLS clocked the Consumer Price Index (CPI) rising at a 5.6% annual pace, but nobody I know buys into that.

For those who distrust the government's take on inflation, or who just don't want to wait a month for the next indication, I propose a new method: one that allows you to gauge inflation in real time from readily obtainable information.

If inflation's the loss of purchasing power metered by price changes, why not use a monetary constant like gold to take its true measure?

Gold's price is readily available as is the dollar's value against other currencies. You could, for example, keep track of the price of gold in greenbacks and in euros. The difference in the rates of appreciation (or depreciation) can give you the basis for calculating your purchasing power loss (i.e., inflation).

In May 2006, for instance, gold sold for $658 or €515. As of yesterday's morning fix, the metal was worth $817 or €549. That's 24.2% appreciation in the dollar price, but barely a 7% uptick in terms of euros. Annualizing the difference in the rates of return gives you an implied inflation rate of 13.6%.

And that, people tell me, is a much more realistic estimation of the price shocks they've countenanced recently.

 

Inflation Measured By Gold

Inflation Measurement by Gold

 

(See implied inflation via gold.)

 

 
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Comments (3)

 Thursday, 28 August 2008 12:15 EST - Posted by Brice Timmons

 
Not a perfect way to calculate it, but better than the damned CPI. Treasury has a double incentive to keep inflation numbers low. 1) It presumably bolsters confidence. 2) It gives taxpayers a backdoor tax increase when the numbers are out of line with reality. (Treasury determines inflation-adjusted rates unilaterally.)

 Sunday, 28 September 2008 12:38 EST - Posted by costas los

 
Thank you for the suggestion concerning cost to risk analysis mentioned on another of your posts. Regarding performing an inflation test in real time between gold and the usd and gold vs the euro, i wonder if you believe, as several other gold commentators, that the gold and silver markets are highly manipulated by the bullion banks. If the bullion banks are both the long and short players of the same commodity, surely we cant use gold as a gauge of inflation, as it wouldn't reflect its true price? In fact recently there were numerous news wires suggesting that coin suppliers can no longer get eagles, krugs phillies and the like. How can the supply of real gold be contracting while paper gold prices are also falling?

 Sunday, 28 September 2008 13:17 EST - Posted by Brad Zigler

 
Bullion banks operate on the spread between gold lease rates and other interest-bearing instruments. We offered a detailed explanation of the gold leasing market in our August 22 podcast.

Very rarely are such banks on both sides (long and short) or the metals market. They're customarily short.

Suffice it to say here that the actions of bullion banks (and other gold borrowers for that matter) are oftem miscunstrued. Ideally, a bank would want to borrow gold in a bear market, so it can repay its loan with with cheaper metal.

Thus, you can't really say that the borrowing and subsequent sale of bullion itself brings down prices. Falling prices may, in fact, be ANTECEDENT to, and not a CONSEQUENCE of, gold leasing.

As far as the coin shortage goes, its just that, a shortage of COINS, not bullion itself. Coins must be minted, so there's a long lead time between order and delivery. Bullion meeting Mint specifications must be acquired, dies and and equipment readied and production time slotted into existing schedules. Quality control for bullion coins is a lot more stringent than for circulating coinage.



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